Mark McLaughlin looks at when documents held by third parties might be in a taxpayer’s ‘possession or power’.
It is not uncommon (e.g., during a tax return enquiry) for taxpayers to be issued with information notices requiring them to provide HM Revenue and Customs (HMRC) with information and documents ‘reasonably required’ to check the taxpayer’s tax position.
Too much to ask?
However, an information notice only requires a person to produce a document that is in the taxpayer’s ‘possession or power’ (FA 2008, Sch 36, para 18). There is a right to appeal against information notices (subject to exceptions) and against penalties for non-compliance.
HMRC considers that ‘possession’ means that the taxpayer has physical control over the document, irrespective of who the document belongs to. Furthermore, a document is in the taxpayer’s ‘power’ if they can obtain the document from whoever holds it. This ‘ability’ to get the document can be through a legal entitlement to obtain it from the third party, or the influence the taxpayer has on the person who owns or possesses the document (see HMRC’s Compliance Handbook Manual at CH22120).
‘E’ for effort!
The lengths taxpayers should go to obtain information and documents has been the subject of several notable cases.
For example, in Horsler v Revenue and Customs [2024] UKFTT 561 (TC), HMRC issued an information notice as the taxpayer was believed to have received funds from a company through a ‘remuneration trust’ scheme and may have used an arrangement intended to avoid liability to the ‘loan charge’. HMRC also wanted to check certain information disclosed in the taxpayer’s tax return. The taxpayer’s representative responded to the information request, but HMRC considered that the responses were unsatisfactory. HMRC subsequently issued penalties to the taxpayer for failure to comply with the information notice, and a schedule of items from the original information notice, which HMRC considered remained outstanding.
On appeal, the taxpayer maintained that the missing documents were not in his possession or power. The First-tier Tribunal (FTT) considered whether the taxpayer had made a serious attempt to obtain documents from a third party. The FTT was shown an email sent to the third party, but there was no response or follow-up. The FTT concluded that the relevant materials were in the taxpayer’s possession or power. As to whether the taxpayer had a reasonable excuse for his non-compliance for penalty purposes, the FTT pointed out that a reasonable excuse could exist while attempts to obtain documents were ongoing. However, the taxpayer did not suggest that enquiries were ongoing, but that nothing further could be obtained. The FTT did not consider that the taxpayer had a reasonable excuse.
Seems like a plan…
Helpfully, in Horsler the FTT set out three steps it would expect a taxpayer to take in making a “serious attempt” to obtain documents from a third party:
(1) Make a clear written request for the documents, if necessary explaining the reasons why they are needed.
(2) Follow up to ensure the request has been received.
(3) If the request is refused, make “reasonable attempts” to address any issues giving rise to the refusal.
Unfortunately, in Mr Horsler’s case, the FTT noted that evidence of his attempts to obtain materials from third parties was “thin”.
Practical tip
The FTT’s decision and comments in Horsler do not set a binding precedent; but the above steps would seem very sensible guidelines to follow.
